Jobs Finally Matter to Wall Street
09/30/09
The market continues to confound everybody. This week brought some bad news, but stocks refused to decline, even though they should have. Take the Chicago Purchasing Managers Index (PMI) for instance, which is closely watched due to its timeliness and the fact that the region represents a reasonable cross section of national manufacturing activities. The index came in at 46.1 versus expectations of 53.5. This is probably the most dramatic miss that one can imagine. Not only did the index return to the contraction level below 50, it also missed estimates by 14%. That is such a huge swing that it causes nightmares for any fund manager. The Dow Jones Industrials reacted initially in a predictable fashion by declining 130 points within 10 minutes. But then the mechanics of modern finance set in. The index returned over the rest of the day back to the plus side, sold off 2 hours before the close to minus 90 and then recovered to minus 27 by the end of the day. Why? Performance anxiety. Investors are afraid of losing their stock. They don't want to sell now. They can't afford to sell now. They need the exposure. They need to have as little cash as possible. If you sell on this purchasing managers' news, you end up with too much cash for the end of the quarter and then you have to answer why you are sitting out a rally that has advanced almost 60% in 6 months. Nobody wants to have to answer to those questions. So selling dried up and the bears covered their shorts and underinvested managers jumped at the chance to deploy some cash. The result was some of the most chaotic market action we've had in a long time. This market has had a tremendous amount of skeptics all the way up. Many folks just can't reconcile this buoyant action with their personal views of the economic situations but fighting the strength has been a big loser, and that is why we have dip-buying on every pullback. The market is still overbought, but the polarization between bulls and bears causes bears to sell into upward spikes and bulls to buy into downward spikes. The result was a jerky market with lots of noise and many false moves. Needless to say, it is a difficult market to trade or to invest in.
The relentless upwards trend stopped last week and seems to have reversed as of today (10/01/09). The above charts were the culprits by implication. The Manufacturing PMI Index of the Institute for Supply Management (ISM) disappointed by coming in at 52.6 versus expectations of 55.7. The New Orders component (second chart) also retreated from 64.9 to 60.8. You may remember that the ISM index is one of the leading indicators that investors are watching. It bottomed in December at 32.9 three months before the stock market reached its final low in March. Coupled with the hangover from yesterdays Chicago PMI caused the market to sell off convincingly. The first day of the last quarter of the year started on an ugly note. The Dow Jones Industrials lost 200 points on increasing volume and breath was extremely poor. The tricky thing in this market is that similar technical breakdowns in the last few months have lead to some very aggressive upside reversals. Just when it looked like the bears were taking control, we'd come roaring back, and not only would we bounce but we'd keep on going. The problem right now is that investors need positive news either from the economic front or from the earnings front. Earnings season starts in two weeks and the economic news lately indicates a pause (at best) or a reversal (at worst) in the economic recovery. Therefore stocks may flip flop in a vacuum. This coming earnings season will determine the future direction of this market not only important because of the official earnings releases, but especially because of the conference calls that follow these releases. In those conference calls managers are asked about the future of their respective businesses and that is what will give investors the confidence to continue buying (or not). So that information will give us a better feel by the second week of October. In the meantime, the creation of jobs needs to start now. Today's initial claims for unemployment insurance actually increased and reversed the small declines of the last couple of weeks. That is not what this market needs at this juncture.
Initial claims for unemployment insurance rose today from an upwardly revised number last week. That does not give me much hope for tomorrows payroll number. The spike that came after the Lehman collapse one year ago has not been reversed by a long shot. The stock market touched pre-Lehman levels last week but the labor market has still over 2 million jobs to create. Just look at the continuing claims scale on the left hand side of the first chart. 2 million new jobs - Wow! In addition you can see that the index of aggregate hours worked (second chart) has not been recovering at all. On the contrary, the index continues to decline. This economy recovers while simultaneously shedding more jobs. This is not necessarily unlike all other recoveries over the past 50 years, but jobs matter and they need to be created. The problem is that the stimulus package is not being implemented fast enough and was really ill equipped by Congress (what else is new) to accomplish the creation of jobs. Unemployment typically has always lagged GDP by six to 12 months. So we still have a quarter or so to watch, wait and pray that employers finally bite the bullet and start hiring again. The problem is, that congress is still busy grandstanding and "cleaning up" last year's disaster. The hunt for easy culprits, the debate over healthcare and the general climate of controversy in Washington do not facilitate aggressive hiring at moment. Managers rather sit tight and wait, while collecting profits from pared down operations. Rising stock prices even validate that decision, so far. I believe that the liquidity created by the central banks in this world is still swapping around the globe, looking for a home. The problem is that almost all assets rose in unison and there are no undiscovered value plays left. October may be a time for defense after all.
Hermann Vohs
"A positive attitude may not solve all your problems, but it will annoy enough people to make it worth the effort."
Herman Albright
Hermann Vohs is president of Cales Investments, Inc., a registered Broker-Dealer. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions. Opinions expressed in these reports may change without prior notice. Hermann Vohs and/or the staff at Cales Investments, inc. may or may not have investments in any of the markets cited above. Hermann Vohs can be reached at 303-765-5600.
This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities.
